Commentary on Economics, Information and Human Action

Walmart Express, market definition, and local politics

Recently Walmart announced that they would begin operating small-format stores called Walmart Express, the first two of which opened in June in Arkansas. If you look at the portfolio of earlier Walmart stores, they range in size from the 185,000 square foot Supercenter (the big kahuna) to the 42,000 square foot Market (with a smaller range of items, focusing on groceries and pharmacy). At 15,000 square feet, the Walmart Express store is a different beast:

Walmart Express has been created to offer low prices every day in a smaller format store that provides convenient access for fill-in and stock-up shopping trips. The stores give Walmart flexibility in serving customers, especially in rural and urban areas where shoppers may not have access to larger stores.

The Walmart Express test stores average 15,000-square-feet and offer groceries and general merchandise, including an assortment of fresh produce, dairy and meat, dry goods, consumables, health and beauty aids, over-the-counter medicines and more. Many have pharmacies as well.

From a shareholder value perspective, developing this smaller-scale store is a sensible market development strategy in light of the economic challenges retailers have experienced during the recession — maintaining positive comparable-store sales numbers during recessions is tricky, even for a low-cost leader. If Walmart can see positive profit margins at these stores, that will provide more evidence that their real competitive edge is not the economies of scale associated with big-box retail, but is rather the supply chain logistics and operations management for which they have become famous (or infamous, depending on your perspective). Essentially, I think they are “leveraging” (sorry for the jargon, but I think it’s correct here) all of the supply chain logistics efficiency and cost-cutting they have generated in their larger format stores to make the economics of the smaller store more attractive.

That’s the beginnings of a value story for the producer side’ now, what about the consumer side? Pay attention to how Walmart is framing the Walmart Express store: “The stores give Walmart flexibility in serving customers, especially in rural and urban areas where shoppers may not have access to larger stores.” In rural areas, they might site a Walmart Express store in a community that is too small to sustain a larger store. In urban areas, high population density means that the constraint is not market size, but is rather land scarcity and prices. So the constraint is on a different margin, but the smaller store format may serve the small rural and dense urban market (with local differences and customization in merchandise, to be sure). If Walmart can leverage their supply chain logistics to bring their low-price model to these markets, this could expand the market while increasing competition, all of which benefits consumers. And, in a city like Chicago with low-income neighborhoods that qualify as “food deserts”, a store like Walmart Express could provide retail access to fresh food in such areas.

Thus it shouldn’t surprise you that Chicago is one of the target markets for Walmart Express, at least three of which are scheduled for development during 2011. Two of them are in my southeast-extended Lakeview neighborhood, one at 2840 North Broadway (an area that, while not low income, is definitely not well served by retail grocery establishments) and a second one mile north at 3636 North Broadway. Both of these sites are 14,000-ish square feet and have been empty (in the more northern one, empty for four years!).

The siting of the second one is economically curious, because while five blocks from Wrigley Field and thus full of foot traffic (not to mention the high population density and economic and demographic diversity), this area is not bereft of grocery options: Jewel at 3531 North Broadway (a traditional grocery store, on the small side), Treasure Island at 3460 North Broadway (a Chicago institution, christened by Julia Child as the “most European grocery store in America”), and Whole Foods at 3640 North Halsted, about one block from the proposed Walmart Express. It’s also directly adjacent to a dingy and somewhat dilapidated Walgreens, which announced this week that it would revamp and build more produce-carrying stores in Chicago, targeting food desert neighborhoods.

What to make of this? I think it reflects the model I suggested a few years back about evolving grocery retail competition among Whole Foods, Trader Joe’s and Costco — this is a market characterized by simultaneous rivalry and product differentiation. The market in that neighborhood is big enough for all of those players, and if you made a Venn diagram of their target markets, you’d see some overlap, but not that much. Jewel has so-so produce and does the traditional coupon/loss leader competition, TI is smaller and gourmet focused, Whole Foods is healthy eating at a higher price point. I anticipate Walmart Express will use their existing supply chains for meats and produce, which are strongly imbued with environmental sustainability practices at their trademark low prices. My analysis of this particular market is that those who want better produce and meat but struggle to afford Whole Foods will be the target Walmart Express shopper — making them better off and generating profits for Walmart with little, if any, diminution of profit for Whole Foods. I’m not as sure about the outcome with respect to packaged grocery items and Jewel relative to Walmart Express; we’ll have to watch and see!

Of course, there’s also a local political story here, as described in this Crain’s Chicago Business story. Although the site does not require any zoning change, newly-elected alderman James Cappleman is miffed at having not been consulted directly by Walmart well in advance:

Alderman James Cappleman (46th), whose ward includes 3636 N. Broadway, says he heard about the deal from residents at a community meeting last week and was first contacted by Wal-Mart on Tuesday afternoon, after Crain’s initial inquiry.

“One of my concerns is I’m just now finding out about it,” says Mr. Cappleman, who was elected earlier this year and says he will seek input from the local chamber of commerce and neighborhood groups. “I’ve been very clear from the very beginning that I’m an alderman that works with the chambers and community organizations. We need to hear from any interested business very quickly so we can make decisions about what’s best for this community.”

I reject Cappleman’s top-down “I’ll be the judge of what’s good for the community” attitude. Just because he’s the elected alderman of the neighborhood does not make him the ultimate arbiter and gatekeeper for what is “good for the community”. Sadly, in Chicago (and I suspect other places too), aldermen have developed an entitlement attitude on this subject, and often act as gatekeepers for the protection of the political class in their ward, rather than the largely silent distributed community. I’ll be interested to see the consequences of this evolution.